USD Reserve Days Numbered

Larry Fink heads the world’s biggest asset manager, Blackrock.  When Larry talks, people tend to listen.  He is becoming part of a broader voice warning of the implications of US policy on its hegemonic role as the world’s reserve currency.  

Others including Putin lately have warned of the weaponisation of the USD through sanctions and even trade policy.  They are walking the talk by dumping US Treasuries as we discussed recently here and just last month Russia and China announced they were working toward bypassing SWIFT to engage in trade using the ruble and yuan, not the USD.

In addressing the ‘weaponisation’ and huge swap of USD Treasuries reserves to gold by Russia, Putin back in July said that whilst “Russia isn’t abandoning the dollar,” he said “We need to minimize risks, we see what’s happening with sanctions.” Why?  Because "Regarding our American partners placing limitations, including those on dollar transactions, I believe is a big strategic mistake. By doing so, they are undermining the trust in the dollar as a reserve currency".  We discussed this at the time here.  Indeed most recently, just overnight we learned that SWIFT have bowed to Trump’s pressure and have blocked payments with Iran.  Another compelling case for Ripple….

Larry Fink comes from a different angle.  This week speaking in a panel discussion at the New Economic Forum in Singapore, he warned that it is the US’s fiscal policy of more and more debt, with larger and larger deficits ahead of rising interest rates that will see a loss of faith in and eventual abandonment of the USD.  Fink draws the accurate analogy of these big holders of US debt in the form of US Treasuries effectively being the US’s banks.

"The problem is we are living with a deficit that is very large. We are fighting with our creditors right now worldwide," 

"Generally, when you fight with your banker, it’s not a good outcome,"

"I wouldn’t recommend you fight with your lenders, and we’re fighting with our lenders. Forty percent of the U.S. deficit is funded by external factors. No other country has that."

"We are going to have more and more debt because of the deficits, and because of the deficits, the investors are going to demand a bigger premium," 

"We have greater risk for higher rates and will not allow the equity markets to flourish."

"There are some great needs in society right now," 

"And a $1.3 trillion deficit as the economy slows down is a real problem."

Apart from weaponisation kick back and drowning in debt the USD also has a 3rd assault on its hegemony.  As with all previous modern empires, eventually your position as #1 economic power is lost.  As you can see from the chart below the US took over the British Empire after WW1.  Since WWII the US’s economic supremacy has been on gradual decline whilst China has steeply increased.

As power shifts, so does reserve currency status.  Below is an excellent pictorial of the history of world reserve currencies.  The USD is certainly getting long in the tooth…

The US dropped gold from the currency equation in 1971 and embarked on an epic credit cycle the likes of which the world has never seen.  As Fink suggests, credit cycles always end as you can’t ‘play pretends’ forever.  As it has countless times before, gold will be there at the end.